Here To Stay

Stocker operations may wax and wane with the price of corn — but the sun will never set on the U.S. stocker industry. The earth is not going to open up and swallow the stocker sector of the U.S. cattle business. In fact, opportunities for stocker operations are likely to grow over the next few years, according to three cattle industry experts. The stocker future depends, though, on three basic

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Stocker operations may wax and wane with the price of corn &#8212 but the sun will never set on the U.S. stocker industry.

The earth is not going to open up and swallow the stocker sector of the U.S. cattle business. In fact, opportunities for stocker operations are likely to grow over the next few years, according to three cattle industry experts.

The stocker future depends, though, on three basic premises: grain prices relative to grazing, regional cow numbers and the changing structure of the beef industry.

“Stocker operations add value to roughage and generally provide the most efficient and least-cost gains,” says Chuck Lambert, chief economist for the National Cattlemen's Beef Association (NCBA). “Additionally, with 85% of the nation's calves born in the spring, stocker operations help meter a steady flow of cattle into the feedlot sector.”

Over the last two years, however, the industry has seen a tendency for calves to go directly from weaning into feedlots. Part of the reason for this is low grain prices relative to grazing, and part is due to available feedlot pen space, explains Lambert.

“At 85% full, most of the fixed costs of a feedlot are covered. As feedlots go from 85% to 95% capacity, that last 10% provides very cheap feeding — especially with today's price of corn,” he adds.

Of Corn And Wheat

While corn is king in cattle feeding, winter wheat pasture rules the stocker sector. Where there is wheat, there are stockers — at least in a huge area of the High Plains — including large parts of Kansas, Texas and Oklahoma. For cattle feeder Steve Smola, Watonga, OK, wheat pasture is like a giant magnet, pulling fall-weaned calves into his area.

“Wheat pasture will normally be the cheapest way to get those calves ready for finishing in this part of the country,” says Smola. “We didn't have a lot of wheat pasture this past year, though — and a lot of those calves went into growing yards that had been closed for years. There were even some new operations that went into the backgrounding business.”

Smola agrees with Lambert that the price of grain is the key to the future of the stocker business.

“No matter how you look at it, the price of grain makes the difference in the profitability of running stockers,” he says.

That grain price largely depends on the $20-$30 billion paid each year by the government in subsidies for production of major feedgrains, adds Lambert.

“As federal budgets tighten, and possibly as public support wanes for pumping this kind of support into agriculture, we're more likely than not going to see higher grain prices,” he says.

On the other hand, urban development and encroachment on prime grazing lands could work to tighten grazing resources in some parts of the country. Also, any significant loss of grazing rights on public lands could reduce stocker grazing and move more cattle directly into feedyards.

“If those things were to happen — and if grain prices were to stay relatively cheap, we might see the available grazing lands used more for sustaining the cowherd, and more calves would move directly into the feedlot,” says Lambert. “But, a lot would have to happen for that scenario to play out in any significance.”

In areas like the Flint Hills of Kansas — traditionally better suited for spring burning and double-stocking or intensive grazing — ongoing stocker and cow/calf tug-of-wars might be more realistic.

“At some point, economy of scale and the competition between stocker operators and cow/calf operators will determine how those grazing resources will be used,” Lambert continues. “If the stockers are making a profit, they may outbid cow/calf operators for grazing.”

But then you kill the goose that lays the golden eggs, so to speak.

“If you put those cows out of business, you tend to tighten calf supplies,” Lambert explains.

Structure Change

The structural changes being experienced in today's beef industry also are sending ripples through the stocker business.

“We're seeing more stocker operators who aren't what we'd call independent entities,” says Randy Blach, Cattle-Fax CEO, Denver, CO. “The stocker operators, in many cases, are retaining ownership or finishing cattle. We have feeders owning a higher percentage of the calves off the cow. Somebody who may not own the cattle is providing the service of caring for those cattle before they come into the feedyard.”

Blach believes that trend will continue as production and marketing alliances pull in more cattle.

Will the movement towards production programs and alliances tend to bypass the stocker sector?

“The percentage of calf-feds probably won't change with the program cattle,” says Lambert. “Even with the more popular programs we're seeing today, and even though they might be using British-Continental crosses, they still involve a lot of yearling-type cattle.”

Also, the industry is better able to use heavier-weight cattle with the innovations in further processing, more value-added activity and new muscle separation techniques.

“There are grids and formulas out there accepting 1,000-lb. carcasses,” says Lambert. “That means we might get by with even fewer cattle. They can be grown longer and bigger on forage, and the grain resources can still be used to put quality in those cattle and optimize production from all the resources.”

The larger feeding operations continue to feed a higher percentage of the cattle. It's important they know where that next fill will come from and when it's coming into the feedyard, says Blach.

“We like to have a backlog of cattle for ourselves and for our customers during a certain timeframe,” adds Smola. “We'll plan wheat pasture cattle from January through May — and grass cattle from July through October. This helps us manage our seasonal supplies and keep our pens full year-round.”

What's the trend for meat packers owning stocker cattle?

“I doubt if the packers would really want to get into the stocker business,” says Blach. “Obviously, there's more packer feeding in some areas, but I'd be surprised to see the packers move into the stocker business anytime soon.”

“Northern producers might manage winter weather risk by moving to more summer grazing with stockers,” he says. “It's no secret the cost of winter feeding is a huge disadvantage in the Northern Plains compared with the Southeast, where cattle can be grazed most months of the year.”

The decision to avoid feeding cows through the winter might drive part of a regional stocker shift that would still utilize the grazing resources.

With most of the “border issues” pretty well ironed out at this point, international feeder cattle trade will play a role in the stocker business.

“We've seen imports of Mexican stocker cattle increase a little over the past few years because of the value of the Mexican peso versus the U.S. dollar,” says Smola.

Depending on the year, the U.S. imports 800,000 to 1.1 million head of feeder cattle from Mexico.

“The Mexican calves today are not the Mexican calves of 10 or 15 years ago,” adds Smola. “They have a lot of U.S. genetics, and the calves are not a lot different than those born in the U.S.”

We're beginning to see the evolution of a “North American beef system,” says Lambert. He sees this leading to a northern tier/Montana cattle cow/calf-yearling system coupling with the Canadian prairie province feedlots. In the South, there will be a southern tier/Texas stocker-feeder system coupling with Mexico cow/calf producers.

To see what the future might hold, Blach likes to look at the economics of the stocker business over the last 20 years.

“Winter stocker programs, whether on wheat, rye, oats, or grass in California — where those cattle are bought in the fall and sold in the spring — have worked very well,” he says. “In more than 15 of the last 20 years those programs have been profitable,” says Blach.

Meanwhile, summer stocker programs have not been quite so healthy. In 12 to 13 of the past 20 years, the summer stockers have been able to record a profit, says Blach.

“This year we're looking at some pretty good returns — with a lot of the producers making $30-$60 per head on their summer stocker cattle,” Blach says.

Whatever the region, though, the key is to be flexible with regard to grazing resources.

“Today, with the cost of gains relatively cheap in feedyards, there are fewer cattle in stocker programs,” explains Blach. “But, as grain prices work higher over time, we'll see a move back to those grazing resources.”

And, it's quite likely we'll see grain prices easing higher over the next few years.

“We're looking at somewhere around 9.2 to 9.3 billion bushels of corn this year,” says Blach. “That will drop the carryout stocks and stocks-to-use ratio, and those things will start to underpin prices,” he adds.

He estimates that over the next three to four years, grain prices could average 40-50¢/bu. higher. Blach also suggests the U.S. could see some renewed grain export activity over the next few years — which could further bolster grain prices.

Staying Engaged

“I think there's opportunity for stocker operators of all sizes — whether you are currently in the cow/calf business or the stocker business,” Blach says.

For the small cow/calf producer who's having trouble finding a place in today's industry structure, there might be a place for them to stay engaged in the cattle industry by replacing cows with stockers.

“One of the keys for the smaller producer, just as it is for the larger producer, is understanding what they're producing,” says Blach. “That means how their cattle perform on grazing programs, in feedyards and on the rail.”

He says the U.S. cattle industry is seeing some of the widest price spreads experienced in the business.

“A lot of the price spreads are being driven by those producers who know how their cattle perform,” Blach explains. “Feeders and packers are willing to pay more for those cattle because they do not pose near the risk of other cattle.”

Lambert adds that the bottom line is that a steady supply of calves coming off backgrounding and stocker operations to meet the needs of the feeders are needed.

“There's an abundance of resources out there today in all regions,” adds Blach. “I don't see any real limitations in people getting into the stocker business.”

“The stocker operator is always going to be there,” concludes Smola. “Particularly when we have the higher-priced grain, we need stockers to use more of our grazing resources, whatever and wherever they might be.”